U.S. high yield defaults drop to 10.3% in June, recover rate rises sharply, Fitch says

New York, July 23 - The U.S. high yield default rate fell to 10.3% for the 12 months ending in June, according to Fitch Ratings.

At the same time the recovery rate has improved substantially, rising to 33% of par for the first half of 2003 compared to 22% for all of 2002.

Fitch described the total of $2.3 billion of defaults in the first half of 2003 as "promising."

June saw 10 issuers default, led by WestPoint Stevens, which was the third default in 2003 to top $1 billion.

By comparison, for the first half of 2002 there were 12 defaults of $1 billion or more.

Total defaults are also down, to 57 for the first half, a 47% reduction from 108 in the comparable period of 2002. Dollar value fell 69% to $17.9 billion from $57.3 billion.

Fitch said the decline was due to the market's stronger credit mix following the record bankruptcies and restructurings of 2001 and 2002.

Notably, telecoms saw a default rate of 4.9% in the first half of 2003 compared to 43.5% for all of 2002.

However, telecom was still the sector with the biggest dollar amount of defaults in the first half with $4 billion, ahead of health care and pharmaceutical at $3.8 billion, transportation at $2 billion, metals and mining at $1.2 billion, food, beverage and tobacco at $1.2 billion and textiles at $1.1 billion.

By rates, the worst was health care and pharmaceutical and textiles and furniture, both at 12.6%, transportation at 8.8%, metals and mining at 8.4% and food, beverage and tobacco at 7.1%.

Fitch said the default rate has also been helped by a better funding environment.

Indicating the market's greater appetite for risk, Fitch said that of 283 bonds rated CCC or lower 30 were priced at 60% of par or below at the end of June, down from 101 at the end of 2002. At the same time, the number priced above 80% of par rose to 178 from 91.

Rating activity was still negative but better in the second quarter.

Downgrades (excluding defaults) in the three months totaled $22.4 billion, down from $48.4 billion in the first quarter.

The ratio of dollar downgrades to upgrades improved to 2.5:1 in the second quarter from 10:1 in the first quarter.

Fitch said the improvement in the weighted average recovery to 33% of par in the first half was helped by fewer low value telecommunication defaults. Defaulted telecom issues, which have consistently posted recovery rates in the low teens, severely dampened recovery rates in 2001 and 2002, Fitch said.

But even excluding telecoms, recovery rates rose to 38% in the first half from 34% in all of 2002.

Fitch's default rates is based on the U.S., dollar denominated, non-convertible, speculative grade bond market (the rating equivalent of BB+ and below, rated by Fitch or one of the two other major rating agencies). Fitch includes rated and non-rated, public bonds and private placements with 144A registration rights. Defaults include missed coupon or principal payments, bankruptcy, or distressed exchanges. Default rates are calculated by dividing the volume of defaulted debt by the average principal volume outstanding for the period under observation.

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